Mtr and Kcrc: Railway Transport in Hong Kong

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Table of Contents

Introduction
AIM
Content
The Merger
The Formula for FAM
Octopus Cards
Tourist Pass
Conclusion
Recommendations
References

Introduction

This is a study conducted to understand the various pricing strategies that have been adopted after the merger between Mass Transit Railway (MTR) and Kowloon Canton Railway Corp. (KCRC) in Hong Kong and how the privatization of a public utility has affected the pricing strategies that existed under government observation. Both of the above organizations were government-controlled railway organizations within Hong Kong and both have grown considerably under the eye of the government. “HK MTR is famous for its cleanliness, ease of use, safety, and reliability.” (Hong Kong, 2004, MTR network, para.3).

“Kowloon-Canton Railway Corporation (KCRC) in Hong Kong operates the light rail system in the north-west district of New Territories.” (Light rail vehicle for KCRC, Hong Kong, n.d., para.1). Again coming to the KCRC, it is seen that The Kowloon-Canton Railway Corporation … “is wholly owned by the Hong Kong Special Administrative Region government and based in Hong Kong. It is a public corporation concerned with the task of operating and developing domestic, intercity, and international railway services.” (Kowloon – Canton Railway Corporation, 2009, para.1). It is also a The main idea has been balancing the varied interests of stakeholders of KCR- passengers, staff of the two companies, and shareholders of MTRCL.

Under the merged system, the interests of passengers are now paramount and the merged business needs to take cognizance of this fact. However, when considering the financial impacts the following needs to be seen:

KCRC will receive straight away, the following receipts towards incomes foregone:

A straight away payment of $4.25 Billion on the date on which the merger takes place. (Press release, 2006).
Every year a consolidated amount of $0.75B would be disbursed to KCRC
From the commencement of the 4th Year of the service grant, “an annual share of the actual revenue generated from the KCR system based on a pre-agreed set of sharing ratios.” (Press release, 2006, Financial terms, para.4). which works out as follows.

A sharing percentage of 10% for revenue between $2.5Billion and $5 Billion
A sharing percentage of 15% for revenue between $5B – $7.5B
A sharing percentage of 35% for revenues over $7.5B. (Press release, 2006).

The main idea is to protect the interests of the public who are the ultimate owners of the corporation and to seek to conduct activities that could not only add to the long-term profitability of the corporation but also render high-quality service to commuters.

AIM

The aim of this study is to understand the effect of the pricing strategies that came into effect after the merger between Mass Transit Railway (MTR) and Kowloon Canton Railway Corp. (KCRC) in Hong Kong. (Kowloon canton railway corp., 2009).

To understand what the various changes in pricing were and how they have changed and evolved commuters’ lives.

Content

MTR or otherwise known as the Mass transit railway is a very popular means of transportation in Hong Kong. t was initiated in the year 1979 and is now after much inquiry merged with the KCRC which took place December 2, 2007. The Railway system also possesses 211.6 km of rail length with 150 stops in different regions.

MTR is highly cost-effective and efficient in its means of conducting business and for all these factors alone it remains to be the most favored means of transportation in Hong Kong.

MTR also introduced its smart card fare-payment technology in September 1997 which has made it easier for customers to use MTR since. MTR was started in order to accommodate the growing traffic within Hong Kong due to its strong economy. It was a bunch of British transportation consultants who were approached to sort out the transportation issues within Hong Kong and it was their suggestion that introduced MTR in the region. MTR also introduced express lines that connected to the Hong Kong International Airport and a lot of the commuters took the airport express to and fro from the airport. In the year 2000, MTRC became the first railway company to be privatized, beginning the government’s initiative to dissolve its interests in public utilities. The merger led to combining the fare system of the 2 networks.

KCRC otherwise known as the Kowloon-Canton Railway Corporation came into service on 1 October 1910 as a single-track system. This railway system was set up in the middle of all the political outbursts within imperial China and when the construction of railway lines was particularly difficult with the lack of skilled labor and also threatening diseases like malaria and dysentery.

The Merger

On December 2, 2007, the government released the Rail Merger Ordinance. The Ordinance requested KCRC to grant a service concession to MTR and also allow them to take care of KCRC transport services. The entire community was likely to gain from the merger by making MTR a world-class railway operator and to enhance the efficiency of the railway organization and reduce duplication. (Fact sheet: Merger of the MTTR and KCR systems, n.d.).

The rail merger consisted of 2 parts; the first being a service concession agreement where MTR was granted the right to use and deploy the railway assets of KCRC to conduct business for an initial period of 50 years. In exchange, MTR had to pay an amount of HK$750 million annually.

The second component was the sale and purchase agreement where MTR was allowed to purchase some of the railway assets and stores of KCRC for a price of HK$ 7.79 billion for a service concession. (A century of commitment, 2009).

After the merger KCRC became an asset holding corporation under a direction of a managing board consisting of a board of directors who are public officials. During the time of the merger, the Government also requested for certain criteria to be fulfilled most of which had to do with the fare system that worked within the organizations. The government wanted a transparent fare adjustment mechanism (FAM), reduction of fares by the abolition of the second fare system, and so on. Prior to the merger MTR also had highly modernized means to fare collection like the electro-magnetic automatic fare collection system which is like a pre-paid card, then came OCTOPUS the very first contactless smart card using RFID technology. It is also a reliable source for providing data that helps in pricing policy and operational planning. (Lai, 2006). (Community, 2009).

“The fare setting system is in accordance to the Fare Adjustment Mechanism which is the direct drive formula linked to changes in the consumer price index and wage index as well as a pre-determined productivity factor. Fares are reviewed annually

The Formula for FAM

Overall weighted fare adjustment rate = 0.5×iµCCPI + 0.5× iµ wage index – t

Where iµCCPI- yearly percentage change in the Government Composite Consumer Prices Index. iµ wage index – the yearly percentage change in Nominal Wage Index (transport sector)

t = productivity.

t= 0 (first five years following the merger date);

t=0.1% (starting from the sixth year following the merger date).” (Investor’s information, 2009). Once the rail merger happened the collection of fares was divided into 3 categories; Adult, Student, and concessionary. Here the adult fare is as understood the normal fare system without any concessions whatsoever. Whereas the student fare category consisted of all students between the age limit of 16 and 25. Students had a concession on all fares but those that connected to the airport, to Lo Wu Station, and Lok Ma Chau station. Concessionary fares are half the adult rate but fares to the airport are slightly higher and there are no concessions for disabled people.

Octopus Cards

This is a type of card that does not need any contact with reader machines. In operation since September 1997, it is now the most popular electronic cash system with systems installed in most retail stores. (Octopus card: Hong Kong, 2009). This card uses RFID technology and does not require any physical contact with the reader. It simply needs to be swiped in order to be used. The octopus card can be used for multiple uses and can be redeemed at parking lots, chemists, cafes, and clubs making the card more user-friendly and durable. (Boland, 2009).

The introduction of the octopus card has also allowed commuters to travel by any mode of transportation like buses, ferries, trams, and so on. (Hong Kong transport: Hong Kong subway(MTR), 2004). (Mysterious activity on Kingston street, 2009).

Tourist Pass

This pass as the name suggests is a card that is specially designed for tourists and can be used for an entire day of unlimited rides using MTR. The pass is valid for 30 days from the day of issue. (MTR, 2007).

Other Fares

Magnetic cards are paid in advance and pre-determined and are one-way tickets only.

There are also one-day tickets to Disneyland in Hong Kong which can be used for a single day of unlimited travel. (Guest, 2009).

Financial impacts of the merger

Next, it is necessary to consider the areas in which impacts have occurred due to the merger. It is seen that the merger has augured well for the Transport department. The specifics are as follows:

Revenue Generated has increased 65% post-merger to HK$17,628 M and EBITA has increased by 57.7% to touch a new high of HK $9,325. (Announcement of audited results for the year ended 31 December 2008, 2009).

The values of net assets have increased 7.5% to reach a new high of HK$ 97,822M.

Even final dividends rates to shareholders are on the ascent, having been raised by 6.7% to reach $0.48/share.

The assets held have also increased substantively in that it has gone up from HK$155,668 to HK$159,338, an increase of nearly 3% over the year, which indicates better utilization of assets, adding value. (Announcement of audited results for the year ended 31 December 2008, 2009).

Conclusion

The merger was decided upon after evaluating the benefits of the same to the different stakeholders which include the people of the country, the passengers who use these services, the staff and employees at both the organizations and the shareholders. (Press release, 2006). The merger between both of the best railway organizations within Hong Kong has led to MTR making the most of operating business under the economies of scale. With the availability of resources and railway assets by KCRC, MTR has been able to conduct business more extensively. The fare system that has been used and come into being after the merger is highly customer friendly and hence commuters find MTR to be the best choice available to them in the sector of transportation. MTR is not only successful among people within Hong Kong but also among tourists who visit the land nearly every day. Privatization of a public utility has always been a highly debated topic among many but MTR and KCRC are definitely great examples that can be studied and taken as role examples. Though everything seems fine the future is filled with uncertainties and can be understood only after providing time and effort. The staff of MTR has also been called the most helpful and caring among other organizations. From all this, we can certainly understand why people can never have enough of MTR and why they go back every morning for the same.

Recommendations

Though as perfect as this merger may appear, there is certainly room for changes for an organization as big as MTR. Some of them have been listed below and are plainly personal opinions and not judgments.

There are no concessions for the disabled onboard the MTR rail line which is not a very social and ethical thought. Though the stations have been quite helpful for the disabled, unlike in most other countries around the world MTR does not allow for any concessions whatsoever for the disabled. It is important that they work towards this.
All kinds of food and drinks are banned aboard an MTR rail line. It is quite possible for MTR to simply make a segment of the train where foods and drinks can be allowed on long journeys. This will not disrupt the normal functioning of the railway system.

A merged entity could also mean that there will exist a monopoly within rail transportation, especially whether other modes of transportation may not be applicable.

References

A century of commitment. (2009). KCR. Web.
Announcement of audited results for the year ended 2008. (2009). MTR Corporation Limited.
Boland, R. (2009). How to use the Hong Kong octopus card. About.com: Hong Kong/ Macau Travel. Web.
Community. (2009). Rough Guides.
Fact sheet: Merger of the MTTR and KCR systems. (n.d).
Guest. (2009). Mass transit railway. (MTR). Synotrip. Web.
Guest. (2009). Mass transit railway. (MTR): MTR tickets: Octopus card. Synotrip. Web.
Hong Kong: MTR network. (2004). UrbanRail.Net.
Hong Kong transport: Hong Kong subway (MTR). (2004). Beijing Visitor.
Investor’s information: Does the company require Government or legislative approval to change its fares. (2009). MTR: Caring for life’s Journey.
Kowloon – canton Railway Corporation. (2009). Economic Expert.com.
Kowloon canton railway corp.: TPHIF is in the transportation industry. (2009). BNET Industries.
Lai, T S K. (2006). Hong Kong MTR-A success story.
Light rail vehicle for KCRC, Hong Kong. (n.d.). Kawasaki: K Train Express.
MTR. (2007). Hong Kong Tourism Board.
Mysterious activity on Kingston street. (2009). Hong Kong Hustle: Hong Kong night life, street fashion, culture and cool.
Octopus card: Hong Kong. (2009). virtual Tourist: Real travelers-Real info.
Press release: Statement by SFST on Merger of MTR and KCR systems. (2006). Web.
Press release: Statement by SFST on Merger of MTR and KCR systems: Financial terms. (2006.). Web.

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